Daily market intelligence on mortgages, equity raising, investment sales, and CMBS.

Monday, 11 June 2018

Despite Growth Since 2012, Crowdfunding Still in Infancy

Still in its infancy, crowdfunding accounts for about $5 billion in annual volume. To put that into context, 2016 saw $464 billion of property sales and $530 billion of commercial mortgage originations.

Commercial Real Estate Direct Staff Report

Adam Hooper and Roman Rosario were working for Palmer Capital Inc., a Sacramento, Calif., commercial property brokerage firm, in 2012 when President Obama signed into law the Jumpstart Our Business Startups, or JOBS, Act.

The legislation included a provision that allowed sponsors to market their offerings and raise capital in small increments from the public via the Internet-crowdfunding. It also provided retail investors access to deals that in the past were only open to high net-worth individuals or people who had a personal connection with sponsors.

In early 2013, Hooper and Rosario left Palmer Capital, partnered with two friends with extensive technology experience, and created RealCrowd, one of the commercial real estate industry's first crowdfunding platforms.

The site was the brainchild of Hooper, who has a background in raising capital for institutional investors. He was involved in a couple of deals that were too small to attract the interest of his usual institutional clients. But, he thought, they might fit the needs of individual, accredited investors.

Since its launch, RealCrowd has served as an online marketplace in which investors invest directly in equity offerings that sponsors post on the website. The company charges sponsors a $15,000 upfront fee plus a per-investor processing fee. The minimum investment amount could be as low as $10,000. Investors don't pay any fees. Initially, it focused primarily on what could be considered hard-money loans on so-called "fix-and-flip" properties, that is, residential properties that investors sought to acquire, upgrade, then sell.

During the past five years, sponsors and investors have become more accustomed to crowdfunding, whether directly through equity and debt offerings or indirectly through REITs. Other big names in the commercial real estate sector that have been around since soon after the JOBS Act was passed include RealtyMogul, Fundrise, PeerStreet, CrowdStreet and Realty Shares.

Despite its growth, crowdfunding remains a niche in the industry. It accounts for maybe $5 billion of volume annually, according to an estimate by PwC. To put that in context, last year $464 billion of property sales took place, according to Real Capital Analytics, and $530 billion of commercial mortgages were originated, according to the Mortgage Bankers Association.

And while the sector is still in its infancy, some failures already have occurred. IFunding of New York, which focused on debt and preferred equity investments, and Asset Avenue of Los Angeles, which funded loans, both closed shop last year. Some attribute their shuttering to deals that hadn't gone as expected.

"The concept is fairly simple," Hooper explained. "But the execution and the relationships and the deal flow and building the investor base, that's been the grind behind the scenes."

Changing Business Models

At first, crowdfunding was limited to accredited investors, defined as those with a net worth of at least $1 million, excluding the value of their primary residence, or income of $200,000 for a single person or $300,000 for a family. Crowdfunding was expanded to non-accredited investors in 2015 when the SEC passed Regulation A+, a rule that became part of the JOBS Act that broadened the pool of investors who can participate in certain capital offerings. It also exempts sponsors from having to register offerings in each state in which capital is raised.

Crowdfunding Platforms

Company

Investment Offerings

Amount Funded ($mln)

CrowdStreet

Equity

280.00

Fundrise

Equity and Debt

344.00

Patch of Land

Debt

500.00

PeerStreet

Debt

900 00

Prodigy Network

Equity

600.00

RealCrowd

Equity

225.00

RealtyShares

Equity and Debt

750 00

Sharestates

Debt

1,000.00

Source: Commercial Real Estate Direct

But most crowdfunders, particularly in the commercial real estate sector, still market only to accredited investors. The notable exceptions include Realty Mogul of Los Angeles and Fundrise of Washington, D.C., two of the first crowdfunding platforms. Both launched non-traded REITs in part to allow non-accredited investors to participate in their offerings.

The REITs, which are limited to raising $50 million annually, allow retail investors to invest in diversified portfolios of properties rather than just single-asset deals.

Fundrise was started in 2013 by Benjamin and Daniel Miller, whose family's Western Development Corp. is among the better known developers in the Washington area. So, of course, it initially invested in properties in that area.

Two years later, the company was the first crowdfunder to get into the non-traded REIT business when it launched Fundrise Equity REIT LLC. It now runs three REITs, each tailored to a specific investing strategy.

RealtyMogul, meanwhile, launched around the same time as Fundrise. It raised capital for loans it wrote and syndicated equity ownership in properties.

In 2016, it created MogulREIT I Inc., a non-traded REIT that invests in debt instruments, including subordinate and mezzanine loans, as well as in preferred equity, CMBS and REITs. Its MogulREIT II Inc., which launched last September, invests in value-add apartment properties.

Other early crowdfunding platforms have expanded beyond their core businesses. When CrowdStreet launched in 2014, it served as a platform for equity investing directly in sponsors' offerings. The Portland, Ore., company still offers that service, with sponsors typically seeking $2 million to $4 million from investors. It has raised about $280 million of capital for sponsors since its inception, including $138 million last year.

Since 2015, CrowdStreet also has licensed its investment software to sponsors, operators and developers to use on their own websites for online capital-raising and investor management. Today, about 130 companies are licensing its platform. KBS Realty Advisors, for instance, is using CrowdStreet's software on its KBSDirect.com platform, where it sells shares in its KBS Growth & Income REIT Inc. directly to investors.

"We're not only solving problems for sponsors by licensing the software," said Tore Steen, co-founder and chief executive of the platform. "We're also giving CrowdStreet an opportunity to get in front of these sponsors," which could result in them tapping the platform to raise capital from its investor base.

Preparing for the Future

So far, there has been only one major merger among crowdfunding companies. In July 2017, RealtyShares of San Francisco purchased Acquire Real Estate, a New York firm that pre-funds investment opportunities and syndicates them to its crowd.

RealtyShares started out raising capital for loans that it would provide to buyers of single-family homes. Now it's exclusively focused on offering commercial real estate equity and debt opportunities. RealtyShares has raised about $750 million of funding for 1,100 deals since it started in 2013.

As crowdfunding matures in the coming years, many leaders in the field expect more consolidation.

"There will probably be three or four major players that are fitting different segments of this market," Steen predicted. "The wonderful thing about commercial real estate is it is a huge industry. There are multiple segments and targets for both investors as well as sponsors. I don't think this is a (scenario where) one player wins the whole thing."

Because crowdfunding has existed only for about six years, none of the platforms currently doing business has lived through a downturn. How they fare when that happens could very well determine whether they have a future or not.

So most emphasize educating their investor bases—their crowds—on the risks inherent in commercial real estate investing.

"We're getting late in the cycle," Hooper said. "If investors aren't building the appropriate amount of risk tolerance in their deals, then there's going to be some bad results."

PeerStreet, a Los Angeles crowdfunding platform that initially funded loans against one- to four-family homes, recently made moves to expand into the commercial real estate sector. It hired two seasoned commercial real estate pros, both of whom have experience operating in down markets.

The two are John Devereux, previously the head of commercial real estate at OneWest Bank, who was named PeerStreet's chief real estate officer, and Greg Galusha, who was named head of commercial real estate. Galusha most recently was a partner at Kearny Real Estate Co., a Los Angeles investment manager that's invested through at least two cycles. 

PeerStreet initially will focus on offering loans of $100,000 to $5 million against multifamily properties and mixed-use projects with a residential component.

"We want the marketplace to function and provide value when we do go into a recession," Devereux explained.

Comments? E-mail Tim Casey or call him at (267) 397-3347.

 

Commercial Real Estate Direct Staff Report

Adam Hooper and Roman Rosario were working for Palmer Capital Inc., a Sacramento, Calif., commercial property brokerage firm, in 2012 when President Obama signed into law the Jumpstart Our Business Startups, or JOBS, Act.

The legislation included a provision that allowed sponsors to market their offerings and raise capital in small increments from the public via the Internet-crowdfunding. It also provided retail investors access to deals that in the past were only open to high net-worth individuals or people who had a personal connection with sponsors.

In early 2013, Hooper and Rosario left Palmer Capital, partnered with two friends with extensive technology experience, and created RealCrowd, one of the commercial real estate industry's first crowdfunding platforms.

The site was the brainchild of Hooper, who has a background in raising capital for institutional investors. He was involved in a couple of deals that were too small to attract the interest of his usual institutional clients. But, he thought, they might fit the needs of individual, accredited investors.

Since its launch, RealCrowd has served as an online marketplace in which investors invest directly in equity offerings that sponsors post on the website. The company charges sponsors a $15,000 upfront fee plus a per-investor processing fee. The minimum investment amount could be as low as $10,000. Investors don't pay any fees. Initially, it focused primarily on what could be considered hard-money loans on so-called "fix-and-flip" properties, that is, residential properties that investors sought to acquire, upgrade, then sell.

During the past five years, sponsors and investors have become more accustomed to crowdfunding, whether directly through equity and debt offerings or indirectly through REITs. Other big names in the commercial real estate sector that have been around since soon after the JOBS Act was passed include RealtyMogul, Fundrise, PeerStreet, CrowdStreet and Realty Shares.

Despite its growth, crowdfunding remains a niche in the industry. It accounts for maybe $5 billion of volume annually, according to an estimate by PwC. To put that in context, last year $464 billion of property sales took place, according to Real Capital Analytics, and $530 billion of commercial mortgages were originated, according to the Mortgage Bankers Association.

And while the sector is still in its infancy, some failures already have occurred. IFunding of New York, which focused on debt and preferred equity investments, and Asset Avenue of Los Angeles, which funded loans, both closed shop last year. Some attribute their shuttering to deals that hadn't gone as expected.

"The concept is fairly simple," Hooper explained. "But the execution and the relationships and the deal flow and building the investor base, that's been the grind behind the scenes."

Changing Business Models

At first, crowdfunding was limited to accredited investors, defined as those with a net worth of at least $1 million, excluding the value of their primary residence, or income of $200,000 for a single person or $300,000 for a family. Crowdfunding was expanded to non-accredited investors in 2015 when the SEC passed Regulation A+, a rule that became part of the JOBS Act that broadened the pool of investors who can participate in certain capital offerings. It also exempts sponsors from having to register offerings in each state in which capital is raised.

Crowdfunding Platforms

Company

Investment Offerings

Amount Funded ($mln)

CrowdStreet

Equity

280.00

Fundrise

Equity and Debt

344.00

Patch of Land

Debt

500.00

PeerStreet

Debt

900 00

Prodigy Network

Equity

600.00

RealCrowd

Equity

225.00

RealtyShares

Equity and Debt

750 00

Sharestates

Debt

1,000.00

Source: Commercial Real Estate Direct

But most crowdfunders, particularly in the commercial real estate sector, still market only to accredited investors. The notable exceptions include Realty Mogul of Los Angeles and Fundrise of Washington, D.C., two of the first crowdfunding platforms. Both launched non-traded REITs in part to allow non-accredited investors to participate in their offerings.

The REITs, which are limited to raising $50 million annually, allow retail investors to invest in diversified portfolios of properties rather than just single-asset deals.

Fundrise was started in 2013 by Benjamin and Daniel Miller, whose family's Western Development Corp. is among the better known developers in the Washington area. So, of course, it initially invested in properties in that area.

Two years later, the company was the first crowdfunder to get into the non-traded REIT business when it launched Fundrise Equity REIT LLC. It now runs three REITs, each tailored to a specific investing strategy.

RealtyMogul, meanwhile, launched around the same time as Fundrise. It raised capital for loans it wrote and syndicated equity ownership in properties.

In 2016, it created MogulREIT I Inc., a non-traded REIT that invests in debt instruments, including subordinate and mezzanine loans, as well as in preferred equity, CMBS and REITs. Its MogulREIT II Inc., which launched last September, invests in value-add apartment properties.

Other early crowdfunding platforms have expanded beyond their core businesses. When CrowdStreet launched in 2014, it served as a platform for equity investing directly in sponsors' offerings. The Portland, Ore., company still offers that service, with sponsors typically seeking $2 million to $4 million from investors. It has raised about $280 million of capital for sponsors since its inception, including $138 million last year.

Since 2015, CrowdStreet also has licensed its investment software to sponsors, operators and developers to use on their own websites for online capital-raising and investor management. Today, about 130 companies are licensing its platform. KBS Realty Advisors, for instance, is using CrowdStreet's software on its KBSDirect.com platform, where it sells shares in its KBS Growth & Income REIT Inc. directly to investors.

"We're not only solving problems for sponsors by licensing the software," said Tore Steen, co-founder and chief executive of the platform. "We're also giving CrowdStreet an opportunity to get in front of these sponsors," which could result in them tapping the platform to raise capital from its investor base.

Preparing for the Future

So far, there has been only one major merger among crowdfunding companies. In July 2017, RealtyShares of San Francisco purchased Acquire Real Estate, a New York firm that pre-funds investment opportunities and syndicates them to its crowd.

RealtyShares started out raising capital for loans that it would provide to buyers of single-family homes. Now it's exclusively focused on offering commercial real estate equity and debt opportunities. RealtyShares has raised about $750 million of funding for 1,100 deals since it started in 2013.

As crowdfunding matures in the coming years, many leaders in the field expect more consolidation.

"There will probably be three or four major players that are fitting different segments of this market," Steen predicted. "The wonderful thing about commercial real estate is it is a huge industry. There are multiple segments and targets for both investors as well as sponsors. I don't think this is a (scenario where) one player wins the whole thing."

Because crowdfunding has existed only for about six years, none of the platforms currently doing business has lived through a downturn. How they fare when that happens could very well determine whether they have a future or not.

So most emphasize educating their investor bases—their crowds—on the risks inherent in commercial real estate investing.

"We're getting late in the cycle," Hooper said. "If investors aren't building the appropriate amount of risk tolerance in their deals, then there's going to be some bad results."

PeerStreet, a Los Angeles crowdfunding platform that initially funded loans against one- to four-family homes, recently made moves to expand into the commercial real estate sector. It hired two seasoned commercial real estate pros, both of whom have experience operating in down markets.

The two are John Devereux, previously the head of commercial real estate at OneWest Bank, who was named PeerStreet's chief real estate officer, and Greg Galusha, who was named head of commercial real estate. Galusha most recently was a partner at Kearny Real Estate Co., a Los Angeles investment manager that's invested through at least two cycles. 

PeerStreet initially will focus on offering loans of $100,000 to $5 million against multifamily properties and mixed-use projects with a residential component.

"We want the marketplace to function and provide value when we do go into a recession," Devereux explained.

Comments? E-mail Tim Casey or call him at (267) 397-3347.




weekly-call-to-action

“The Weekly”

“The Weekly” is Commercial Real Estate Direct’s PDF newsletter, sent to subscribers every Friday morning. With over 100 news stories published on Commercial Real Estate Direct each week, “The Weekly” features the top stories in commercial real estate that industry participants need to know first. “The Weekly” also contains:

  • Breaking mortgage, CMBS, and REIT news

  • Quarterly league tables with rankings of B-piece buyers, book runners, and lenders

  • Industry moves and changes in “The Insider“

Data Digest

 

CMBS DELINQUENCY VOLUME

dqdataFP1

 

CMBS SPECIAL SERVICING VOLUME

sschartfp

Top Bookrunners Domestic, Private-Label CMBS - 2017
Investment Bank #Deals Vol$mln MktShr%
Goldman Sachs 17.59 11,819.34 13.68
JPMorgan Securities 14.52 10,968.11 12.70
Citigroup 12.04 10,012.71 11.59
Wells Fargo Securities 14.02 9,936.06 11.50
Deutsche Bank 12.55 9,879.74 11.44

 

RCA CPPI

 

cppichart FP

 

 

CMBS 2.0 Spreads

AAAspreads

Top CMBS Loan Contributors - 2017
Lender #Loans Vol$mln MktShr%
Goldman Sachs 146.89 11,719.34 13.63
JPMorgan Chase Bank 117.68 10,114.14 11.76
Deutsche Bank 198.48 9,689.97 11.27
Morgan Stanley 166.18 8,539.78 9.93
Citigroup 199.05 8,088.24 9.41

 

 

 

REITCafe

  • Challenging Retail Environment Weights on REITs
    Mixed economic news is weighing on retail markets, pushing REIT performance down in 2015. This week, the National Retail Federation announced that back-to-school spending is expected to be down 9.3% in 2015. This news came on the heels of a report from the Commerce Department stating that retail sales declined 0.3%...
     
  • US REITs Feeling Effects from Turmoil in Greece and China
    International economic forces have taken center stage this week, affecting both US stock markets and REITs. The crash in the Chinese stock market and ongoing concerns about the future of Greece in the eurozone drove markets down during the first half of the week. REITs fared better than the overall market...

  • What Does Increased Construction Mean for Apartment REITs?
    REITs so far this year have raised $17.1 billion of capital through the sale of unsecured notes, bringing the total raised over the past two and a half years to just more than $75 billion. That’s more than they raised during the previous five years. The massive volume shouldn’t be a surprise as it comes while the yield from 10-year Treasury bonds, the benchmark...
shouldn’t be a surprise as it comes while the yield from 10-year Treasury bonds, the benchmark against which most REIT’s price their bonds
warehouse-backstage